VARIABLE RARE DISASTERS:

AN EXACTLY SOLVED FRAMEWORK

FOR TEM PUZZLES IN MACROFINANCE

Ten Puzzles

Ten Puzzles

Ten Puzzles

Ten Puzzles

Models Logic: Stocks

Models Logic: Bonds

Models Logic: Corporate Bonds and

Options

SECTION II MODEL SETUP

Presents the macroeconomic
environment and the cash-flow
processes for stocks and bonds

II.A. Macroeconomic Enviroment

II.A. Macroeconomic Enviroment

II.B. Setup for Stocks

II.B. Setup for Stocks

II.B. Setup for Stocks

II.C. Setup for Bonds

II.C. Setup for Bonds

II.C. Setup for Bonds

II.C. Setup for Bonds

II.D. Expected Returns

SECTION III ASSET PRICES AND

RETURNS
Derives equilibrium prices

III.A. Stocks

III.A. Stocks

III.B. Nominal Government Bonds

III.B. Nominal Government Bonds

III.B. Nominal Government Bonds

III.C. Options

III.C. Options

III.D. Corporate Spread, Government

Debt, and Inflation Risk

SECTION IV A QUANTITATIVE
INVESTIGATION
Proposes a calibration and reports
the models implication for stocks,
options and bonds.

IV.A. Calibrated Parameters

IV.A. Calibrated Parameters

IV.A. Calibrated Parameters

IV.B. Stocks: Level, Excess Volatility,

Predictability
Average Levels
Equity Premium (conditional on no disasters) =
6.5%
Unconditional Equity Premium = 5.3%

Excess Volatility
Std. Dev. ln(P/D) = 0.27
Volatility of equity returns = 15%

IV.B. Stocks: Level, Excess Volatility,

Predictability

IV.B. Stocks: Level, Excess Volatility,

Predictability

IV.B. Stocks: Level, Excess Volatility,

Predictability

IV.C. Bond Premia and Yield Curve

Puzzles

IV.C. Bond Premia and Yield Curve

Puzzles

IV.C. Bond Premia and Yield Curve

Puzzles

IV.C. Bond Premia and Yield Curve

Puzzles

IV.C. Bond Premia and Yield Curve

Puzzles

IV.D. Options

IV.D. Options

IV.D. Options

IV.E. Corporate Bonds